Money Rehab with Nicole Lapin - Confessions of a Former Tax Auditor

Episode Date: April 15, 2021

Nicole is joined by former tax auditor Silvia Aguirre to talk about how to avoid getting audited, the truth around common auditing myths, and why your auditor might not be so bad after all. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. You may know that today was supposed to be tax day, but the filing deadline moved back to May 17th.

In honor, though, of this day formerly known as tax day, we're bringing you confessions of a former auditor. If you're like me, you're probably terrified of an audit and auditors. So I wanted to shine some light on this process and the people behind it. All right. Awesome. Well, Sylvia, can you introduce yourself to our money rehabbers? Yes, I can. And thank you for having me. My name is Sylvia Aguirre, and I am currently the Certificate Management VP within Avalara. Avalara is a company that does taxation and does it correctly. And I am a tax expert when it comes down to sales and use taxes and exemption certificates. And I've been doing this since the 1990s. So when you were 12.

Pretty much. Right. So precocious, Sylvia. It's like a Doogie Howser of taxes over here. I'm a little nerdy. Love it. Girl after my own heart. Cool.

We got so excited about taxes. Is it your favorite topic? Is it still your favorite topic? It still is. I still live it day in and day out. More specifically, you know, trying to exempt taxes. But it's all taxes. You're my hero for saying that. So you were an auditor in the 90s. I was. You look so friendly. I am just in

my mind scared to death of auditors. You know, that's a perception, right? I mean, and I have to tell you, when I showed up to audit somebody, they were either friendly or they were very scared, to your point, you know, and I was told many times that, that I had a friendly face, you know, and I came across, you know, as somebody that wanted to help rather than being there to punish or do something drastic with them. Yes. Totally. You're changing my entire perception of auditors right now. That's awesome. That's great. of auditors right now. That's awesome. That's great. So what did you do as an auditor? I mean,

everybody is terrified of getting audited. It is my worst nightmare. And any IRS people listening, please do not do that to me. But it's such a mysterious process. You know, it really is not that mysterious. I bet you anything, if you Google what happens in an audit, you know, there's all kinds of different things I will tell you. I personally audit actually for the state of Texas in the New York area, you had multinational, multi-billion dollar corporations and the way they handle an audit is very different than walking into a recording studio that, you know, just like yours and saying, we're auditing you today.

And one has their act together and the other one likely has items in a box. So you have to react to those two things. But I can tell you a lot of the states and a lot of the governments do try to give you a lot of information so you are prepared to deal with the audit. But I can sense, you know, when I walk in, people are very either open and say, okay, let's go, let's do it, or they're very apprehensive and they just don't want to say anything. I'm apprehensive just talking about it right now. I think my armpits are sweating profusely.

Even when you said a studio like yours, I was like, nope, nope, not like mine. Not here. No, thank you, ma'am. So, okay, forget Google. Like, we have you, Sylvia. So what does an audit look like from start to finish? Absolutely. Let me tell you. So first of all, you're likely going to receive things in writing. If you don't, that's a good indication that things might not start the way they should. So everything you get, you should get in writing. So very politely, you will get an introduction to me.

I will walk in and tell you these are all the things I'm going to need from you, and you have a certain amount of time to provide it. And usually the timing depends on how long the audit is going to take. So likely you're looking to a four-year period that you're going to be auditing. Four years? Four years, likely, yes. That means that as a small organization or any organization, you should always keep your records as long as you can, because somebody can walk in like myself and ask you for information that you need. If you have everything in order, then there's no reason to panic. It's just a matter of reviewing, you know, your records, comparing them to what, you know, the agency has, and then trying to find discrepancies. I also have to tell you, Nicole, that, you know, the perception of an auditor

sometimes is that they're walking in and they're going to create chaos or try to find something somebody is doing wrong or punish them for something. And that's usually not the case. I mean, we're actually normal people. You know, we walk in and we're just trying to find, you know, you're doing the right things for the right reasons. And sometimes, I will tell you this, sometimes things are not being done correctly. And a lot of the times it's because perhaps the legislation could be scary to read and could be scary to understand. It's just complicated. And complicated. And there's pages and pages and pages, right?

So it could be an honest mistake. Absolutely. Anything usually that I found was very honestly an honest mistake and is something that can be corrected. And this is why you're looking at a four-year period because you want to find out when did this go wrong and why. And then just set the company back or the taxpayer back on the right track and say, well, here you go. You're doing the wrong thing.

Now, if I show up four years later and you were still doing the honest mistake, that's a completely different story. But that's usually not what we found. Usually we found it's like we really really did not understand, or we were working through this and it just escaped us or something like that. You know, you probably are wondering, how does this happen? Why did I get targeted for an audit, right? There's so many answers to that question. There's not a simple formula for it, but there are some triggers. There are specific triggers. So tell me all the triggers. So even with the IRS triggers, right? They're red flags, if you might call them that. And those are obviously the most

obvious, Nicole. And you might never do this, right? But if somebody forgot to fill a line in their form, right? They completely did not include anything. So that is the red flag. They will say, wait a minute, it seems like you forgot half of the information or something's totally missing. So that obviously triggers an honest audit. Somebody wants to come back and evaluate that for you. And then there's the more complicated audits. For example, like I was telling you with the state of Texas in New York, sometimes it's dependent on how much business you do with the state. So if you're just doing a little bit of business in the state, maybe the state might not if you're just doing a little bit of business in the state, maybe the state might not order you for a long time

unless there's a red flag like we were talking about, right? But if you're somebody that is constantly doing business in that state, then the state is going to probably say, we just want to make sure you're doing the right thing. Again, because there's just so much legislation. And by the way, the loss in Texas could be completely different than the loss in New York, you know, when it comes down to that specific type of audit and taxation. What are the other red flags? I know a lot of times people say having a home office.

You know, home offices could be scary, but look at COVID. Did everybody go back home and started working from back home? What does that mean? Right. And so I will actually have to say, you have to go look at the legislation and you have to go look and see what does it mean to take advantage of deductions. They're called deductions. If you deduct anything from your home, did you really utilize it as an office? Right. So again, your records will indicate what you're doing. You know, if you were working in your kitchen area and you really didn't have a dedicated office and you deducted things in your forms, that might be a little red flag. But again, it's not like

everybody's going to get audited. Sometimes it's just a random act. And do you give people a heads up before you come over? Everybody, again, if you do not get things in writing, you should be raising your own red flags, you know, and contacting the IRS or the jurisdiction because I'm sorry, you did not give me plenty of time. You did not put this in writing, you know. So you have your rights. Another thing that taxpayers have is rights. You don't have to accept everything. So again, if you don't get it in writing, you don't feel comfortable, even with somebody that's starting you, maybe you feel

Sylvia's just not friendly enough, or I don't understand what she's saying. It is absolutely your right to raise your hand and talk to the jurisdiction, the IRS, and say, can I get somebody else? I just don't feel comfortable. Whatever it is, I mean, you absolutely have rights. No, I mean, if I, God forbid, got audited, I would love to have you. I would not trade you. You would probably give me a big bill, though, with a beautiful smile. I don't know how I'd feel about that. The other part of the audit is finding things that you should have deducted, but you didn't. Right? No way. This is not like come over and I'm going to give you more money.

Well, I didn't say you were going to get more money. I just said when an auditor walks in the door, they should look at everything. They should not just be one-sided. They should be looking and saying, well, we see that you pay taxes on this. Or we see you didn't pay taxes on this. Or we see you deduct on this, or we see you didn't pay taxes on this, or we see you deducted this, and we see you didn't deduct this. So the idea is an auditor is supposed to be there to help you through the whole process and understanding from beginning to end, not just pieces of it. And again, if you feel that you're not getting the whole picture, you know, you don't

understand what's happening, it's absolutely absolutely right to ask for additional help, additional information. So then what happens if you get this letter in the mail and it says, hello, you are being audited with some IRS letterhead? Who do you call for help? Like your lawyer, your CPA, your mom, Ghostbusters? Who are you calling next? Well, first of all, take it very seriously. The first thing you want to do is likely going to have a contact in the letter. If it doesn't, that could be actually a trigger of like, maybe this is not legitimate. You should always have a contact that you can talk to and say,

I got this letter. Is this legit? And then they can give you more information. Now, who do you call? Ghostbusters might not be able to help you. Your mom, if she works with you, maybe, you know, but certainly if you work with a CPA, first thing you need to do is give them a copy of the letter and say, help me, you know, get prepared. The one thing you do want to do when you start an audit is be prepared. Don't wait until the auditor walks in the door. If you know they're coming to audit you, and that letter should have been very definite telling you, we're going to go three years, four years.

We're going to look at this amount of data. This is the records we're going to be looking at. Don't wait until the auditor walks in the door. You know, start working on the requests before they walk in. And then the next thing you know, the auditor's sat there with a smiley face and the audit is finished. I'm sure you've seen people with stuff in a shoebox. I have.

What have you seen? I would love to have this conversation over drinks, but I'm sure you've had some crazy stories. It will require drinks. Yes, absolutely. Great, on me. I won't write them off, but I'll just pay for them. Great, great answer. You work with what you get. You know, I personally, as an auditor, I was very empathetic. You know, I quite understood, you know, what that particular taxpayer was going through. I'm going to have been as empathetic if you were a multi-billion dollar company and you have all the records already in order. But if you're a smaller

organization and you're trying to live day to day and everything you do will cost you money and you have everything in a shoebox, you know, that's what I did. I looked at the shoebox and I separated the items and I worked with the taxpayer to go, let's try to close all the gaps. But that's a little bit of the problem because when you deal with smaller taxpayers, no matter if it's a state audit or an IRS audit, if they don't understand their own records, you know, that's a problem. And you're trying to educate them. It's an education as well, right? It's like maybe you're making honest mistakes. The legislation was hard, but you were doing business. And so as part of doing business in this country, you have to do certain things and just keeping records is one of them.

But I tried. I tried my best to be empathetic. And I looked at all the shoeboxes and we separated. It might take it a little longer to finish, you know, but ideally you want to be prepared. You want to understand where your gaps are but ideally you want to be prepared. You want to understand where your gaps are before an auditor walks in the door. So what's the biggest piece of advice you would give small business owners who do not want to get audited, which is everybody? Well, my piece of advice would be to be prepared for an audit, even if you don't think you're going to get audited. Act like you are going to get audited every day. And I think you maybe might feel like you will be prepared. Also, try to keep up with the regulations. It's always good to keep up with legislation

and try to understand some of the things that could affect your own personal business. You're the only one that understands your business better than anybody else. And that is so true for so many entrepreneurs and so many small taxpayers. And that is so true for so many entrepreneurs and so many small taxpayers. And you're the only one that's understanding your clients better than anybody else. So it is really up to you. My biggest advice is don't wait till the last minute. Act like if you were going to get audited tomorrow and I think you're going to do the right thing. So I actually have a follow-up question for that, if you don't mind. What is the best way then to keep the records? And what do you have to keep and what do you not have to keep? Everything related to your financials, you should keep. Meaning...

Like every single receipt? Every single receipt. A Starbucks latte. If you're going to deduct your Starbucks latte, yes. But what if I'm not? If you're not, then you don latte, yes. But what if I'm not? If you're not, then you don't have to. You don't have to. It's all related to your business. It's all related to what you're deducting as an individual, right? If you don't have a business, if you're just doing your IRS report, the Starbucks coffee is not going to come into the picture, right? It's

only things that you are trying to deduct. And you will say, oh, I use the Starbucks, right? It's only things that you are trying to deduct. And you will say, oh, I use the Starbucks, you know, coffee for, I don't know why you will use it as a deduction for a business. That's like, I went to go meet somebody. Oh, really? If I went to go meet somebody, I do all the time. To meet coffee, coffee, business dates fall into a certain particular legislation and not everything is deductible. But if you are going to claim that you bought that coffee for somebody because you were talking business, you need to have records of that discussion.

You need to have records in explaining who was that individual you were talking to and how is that working for you personally to make it as a deduction. Like what kind of records? Let me just write it on the back of the receipt. As you can say, I was talking so-and-so and this is the individual's relationship to the whole concept. Anything that could help you say, yeah, I could deduct this because it is part of my business. But I can only deduct my coffee or can I deduct both of our coffees? Well, if she paid for her coffee, you can't. It's things that you're paying. But I can pay for everybody or is there a limit? There's always limits, like I said. So you can take, you know, let's say the coffee was five bucks. But when you look at legislation, it might say, well,

you might have spent five bucks, but you can take a percentage of those five bucks. So again, it's complicated. It's always formulas. It's not straight out, hey, here's a five dollar receipt that goes into a whole bucket of a bunch of other receipts that could or could not potentially be deducted 100% depending on the legislation, if that makes any sense. But what if I have, I'm asking for a friend, like a company card for my company, and I just put business-related things like the coffee that I am going to buy for this business discussion, I put it on that card versus a similar card I have, but just for my own personal stuff, if I'm just getting it for myself and my own pleasure, then do I need to save the receipts

if they're on my credit card statement? Absolutely. A credit card statement. Well, let me ask you this. When you look at your credit card statement, do you remember all of those transactions that were there? Yeah, I'm really, I mean, my friend is really smart. She really has a great memory. Sometimes it doesn't even say Starbucks. It says something completely different.

If you notice that. My friend never seems to ever because she thinks that it's totally fine if it's on the statement, like her accountant's going to. I would go to my advice, act like you're going to get audited all the time and save your records. And that way, when you get audited, you don't have any issues. So one last question for my friend. Let's say she gets audited and she doesn't have the receipts and she doesn't have the receipts for those business, legit business coffee dates that she had that were on her statements, but she doesn't have like the

actual paper thing either in real life or on an app. And then what happens? That's very unfortunate, right? Because an auditor, like I mentioned before, they're there to do a job. And if you cannot provide backup for some of the things that you have, then they cannot take it at face value. They just can't. This is why it's so important to have this documentation. Documentation is your best friend in an audit. You're my best friend, obviously, in an audit. I'm calling you right away. So then, okay, one more final follow-up for my friend. If that happens, then those deductions are just, like, negated, and then she has to pay as if they just didn't exist, that that coffee business legitimate expense was not a thing.

So they would recalculate the taxes. Exactly. Yes. legitimate expense was not a thing. So they would recalculate the taxes. Exactly. Yes. And again, it's not straight up 100% because they go into a bucket of all these other deductions and you have no idea how that's going to affect the tax rate and all these other calculations, right? But what if there was like a flood or a fire or you were moving across the country, let's say, during COVID and things get lost, right? Like, honest. It's unfortunate. That is very unfortunate. And again, we rely on

technology, take a picture of things the best that you can, because it is unfortunate if you cannot provide documentation. So set up a little system for yourself. Absolutely. Absolutely. Even if it's old school, like in a filing cabinet. Yes, but then you deal with the fires. So it's best if you do have filing cabinets right now, another piece of advice is go find that app and try to see if you can, you know, start now, start taking pictures of those invoices, And try to see if you can start now, start taking pictures of those invoices, making notes, recording them where they needed to be. Actually, your CPA might appreciate that. If you have a CPA that files your returns, they might be asking you for the same information.

But it will be very helpful if you have this documentation technologically stored. I mean, I will say that my friend does have it together in some senses, and she just figured out her own system where she takes a picture and then puts it in like a Dropbox file or an iPhoto album. Okay. Perfect. Just make sure to document what it was for. Oh, yeah. All right. Yeah, I'll let her know. Thanks. Okay, good. Of course. When do you go to jail? When do you go to jail? Oh, my goodness. I think that's the biggest nightmare people have. They think like, they're going to get audited. They're going to go to jail. It's all over. Doom and gloom. I mean, oftentimes, in general, we suffer more in imagination than in reality. But is that a possibility?

Like, what are the worst case scenarios if you get audited? It's all over the spectrum to the real positive where you might get a refund, right, to the real negative where you were not paying your taxes and you were supposed to and you knew about what you were doing and you did literally do it, that could end up in a bad situation. Ninety nine, nine, nine percent of the time you're going to be right in the middle or in the positive because most people do understand that if you're doing business, there are certain requirements that you need to follow. But going to jail is like the possibility is pretty slim to none. For normal folks. Super duper slim.

Yes. Normal folks do not go to jail. You promise? Wow, this was so informative. Good. I really do hope that I swayed you to, auditors are human beings and they're just really just trying to do a job

on really hard legislation that everybody's passing. I mean, as we're doing episodes in this, I'm like, I don't understand. I've never seen this before, but like none of us have. Right. That's what makes it really hard. Where do you go to get all this information? Where do we go, Sylvia? Where do we go? I'm only one person. I know. For today's tip, you can take straight to the bank. An audit can look back into four years of your finances. So you should really keep everything for at least that long.

And keeping yourself organized and tech savvy, shit happens. Paper receipts get lost. So take pictures. You can keep it simple. You don't need all sorts of stuff. Just take a picture of your invoices, maybe start a folder on Google Drive or in the cloud or in your iPhoto stream or wherever. You just want to make sure that you keep your receipts in some form and keep them safe. I promise your future self, if the A-word happens, will thank you. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law.

Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikadur and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work.

And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.